By Robb Davis
Recently our Mayor, my colleague, wrote: “Our budget is balanced and resilient. Due to improved revenues and cost-cutting efforts, our budget is balanced with a healthy 15-percent reserve. Better yet, it is a fiscally resilient one in that we are paying what we need to be for our pension and retiree health obligations and are making substantial investments in our infrastructure… Yes, there are still long-term challenges. But we are doing very well.”
I would like to challenge a few of these assertions while highlighting some others.
Dan is correct: we are paying what we need to on retiree medical and pensions, but the costs of these continue to grow more quickly than revenue growth. He is also right that there ARE long-term challenges. But they are not just long-term. They are here now.
In a December 15 report to Council, City staff demonstrated that we are under spending on critical infrastructure and programs by over $10 million on an annual (ongoing) basis.
That is $10 million every year.
This is for things we already have (not new things), including bike paths, streets, sidewalks, park structures, pools, tennis courts, traffic signals, our urban forest, playgrounds, irrigation systems and city building maintenance.
Let me repeat: a $10 million shortfall each and every year—on a current $50 million General Fund budget.
On a positive note, and thanks to improved revenue generation in the past two to three years, our General Fund’s “unreserved fund balance” stood at 26% of operating revenues at the end of 2014/15 (unaudited). That amounts to $12 million.
(The General Fund is the major unrestricted fund over which we have most control—other “enterprise” funds are restricted in various ways and are mostly generated from utility charges.)
If we were to take that entire amount and apply it to this year’s shortfall, we would have a $2-million-dollar reserve—or about 4% of operating revenues. But that is not a solution to our ongoing funding needs because we do not generate that $12 million each year—it has taken several years to build to this reserve amount.
In addition to paying for the necessary maintenance of things we already have, staff also presented a list of “one time” expenses to do “new” things such as upgrade city buildings, update financial systems, build new pools, renovate City Hall and fire stations, improve street conditions around the Richards interchange and Anderson Road, and pay for a much needed update to our General Plan. In addition to the $10 million per year, the one-time price tag on all these “new” items is just under $95 million.
In addition to dealing with unfunded needs, we also face the challenge of keeping our annual recurring operating expenses in check. Employee compensation is a large part of these operating expenses. In relation to staffing and compensation we must deal with a situation in which all the following are true:
- Staff numbers have been cut by over 100 in the past decade (453 to 352)
- The cost of compensating staff has increased from just over $100,000 to over $150,000 per employee in the same decade.
- The vast majority of staff in the city has seen the amount of their take-home check decrease over the past five years, principally due to increased employee contributions for healthcare insurance and pensions.
In sum: total and per employee costs to the City have increased even while employees take home less AND we have 100 fewer employees. And because we have cut staff in a non-strategic way (via attrition), it is not even clear whether we are staffed appropriately to provide city services. We have a highly professional and responsive workforce—with workers taking on many new tasks due to cuts—but because employee costs represent the majority of General Fund expenses we must find ways to contain compensation.
Actuarial experts estimate that the costs of pensions alone will climb from 24% of base pay to 43% of base pay for safety workers and 24% to 32% for other employees between FY14/15 and FY20/21. Those estimates were made before CALPERs made the recent decision to reduce their assumed rate of return on investments from 7.5% to 6.5% over the next 20 years. The bottom line for that adjustment is that the estimated costs are likely to go up. These are amounts the City must pay to provide the defined benefit pension to which all City employees have a right. The future escalation of retiree medical costs is unknown.
City revenue sources are minimally diversified, relying largely on sales tax—overwhelmingly from auto sales—and property taxes. The up and down nature of sales taxes, rising and falling as they do with the broader economy, means that today’s solid numbers can easily evaporate in a few short years. Property taxes adjust upward with the pace of inflation—resetting only when homes are sold. And while the current improving economy has led to significant “resetting,” these revenues do not, over time, grow in a way that keeps up with the costs of service delivery. So while today’s revenue picture is much improved over a just a few years ago, the recent history of our, and most other California cities, should remind us how fleeting such positives can be.
Is this an over gloomy picture of our local fiscal situation? I don’t think so. Very few if any California cities—Davis included—can claim to be fiscally “sustainable” at this point in time.
At a recent League of California Cities’ Conference (a conference for City Council members and Senior City staff) the most “oversubscribed” sessions concerned discussions about how to reduce retiree medical costs, dealing with maintenance backlogs, and the future of pension costs and pension reform. Attendees, of which I was one, left these sessions in a somber mood, each one returning to his/her own city wondering how we are going to find fiscally sound ways forward.
And so I am left with questions…
Is our budget balanced? Not if our budget accounts for all our costs (which it should).
Are we fiscally resilient? Not without greater diversification of revenues.
Is our local fiscal situation doing very well? I am simply not ready to say that.